Over the next few weeks, federal courts in more than a dozen states are going to begin to consider a very interesting question: Does coordination between and among state attorneys general and the U.S. Department of Justice constitute an improper attempt to override federal regulation?
The credit rating agency Standard & Poor’s is asserting that it does, in an argument that could affect how state AGs enforce consumer laws against defendants in regulated industries. You’ll recall that when the Justice Department announced its $5 billion suit against S&P in February, seven state AGs were in attendance to announce their own parallel state-court claims that the rating agency lied about its independence and objectivity, in violation of state consumer protection and trade practice laws. Three such suits, by Connecticut, Illinois and Mississippi, were already under way at the time of the Justice Department filing, and several more states have since brought claims in their home courts. S&P has now removed all of the state-court AG cases to federal court and has asked the Judicial Panel on Multidistrict Litigation to consolidate the proceedings before one of two judges in federal court in Manhattan.
The rating agency’s lawyers at Cahill Gordon & Reindel argue that the coordinated attack by the Justice Department and the state AGs is a de facto pre-emption of the Credit Rating Agency Reform Act of 2006, which gave oversight of S&P and its competitors to the Securities and Exchange Commission. “Taken as a whole, the actions represent a concerted effort to undermine, if not supplant, a detailed, comprehensive and carefully balanced federal scheme through patchwork and inevitably conflicting rulings across the country,” Cahill wrote in S&P’s brief to the JPMDL. “These nominally separate actions – the vast majority of which were filed on the same day and touted as the result of a ‘coordinated’ effort at a joint press conference held by several of the Attorneys General to announce their filing – are, in effect, a single hindsight-infused attempt by the states to lay blame with S&P for failing to predict the financial crisis and they should be treated collectively.”
When S&P made a pre-emptive strike against suits by the AGs of South Carolina and Tennessee by filingdeclaratory judgment actions in federal court, I said that I didn’t think much of the rating agency’s straw-man argument that credit ratings are protected by the First Amendment, since that wasn’t at issue in the state cases. But S&P’s pre-emption argument isn’t so easily dismissed. At the very least, the credit rating agency has bought itself time. (More on that below.) And if it convinces the JPMDL that the state actions interfere with federal regulation, it could seriously impair state enforcement actions.
One immediate benefit of S&P’s maneuver has been to slow down litigation against it. After removing the AG cases to federal court and filing a transfer order before the JPMDL, S&P moved to stay proceedings until the panel decides whether to consolidate the suits. States have generally opposed the stay – they’re eager to litigate remand motions – but on Friday, a federal judge in Pennsylvania agreed to put AG Kathleen Kane’s case on hold until the JPMDL makes a decision. Meanwhile, as S&P forces states to move for remand, oppose its stay motion and oppose consolidation by the JPMDL, it forestalls its day of reckoning on the merits of the state claims against it.